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SPECIAL FEATURE - M&A
The year of merger mania?
M&A activity looks set to continue even after a string of deals announced this
year. Mr Paul Melody, Managing Director, Life Insurance Practice, Asia Pacific,
Towers Watson, shares the drivers behind the M&A activity, and what it takes to
achieve success after the conclusion of a deal.
There has been a string of deals announced in 2015, Despite the warning that past performance is not predictive
with the latest the GBP3.5 billion (US$5.32 billion) of future performance, last year’s net income appears to be a
takeover of UK-listed Amlin by Mitsui Sumitomo. fairly good indicator of the price the market is using to value
This year is likely to be the biggest on record for insurance insurance companies. The question is, of course, will companies
mergers and acquisitions, according to data compiled by be able to grow earnings in line with rates implied by recent
Dealogic. deal prices?
…and the difference between theory and practice
We have selected a number of deals from those announced There are many plausible reasons why any given deal may fail to
to date this year to illustrate the range of drivers behind deal- deliver on shareholder expectations, but it is notable that when
making activity: finance executives are asked why transactions fail to live up to
expectations, the dominant response is around getting people
• A number of reinsurers have announced deals as to work together.
increasing competition from alternative sources of capital,
combined with the absence of major loss events, has meant that Even with the benefit of hindsight where deals have not
premium rates and, therefore, profitability are under pressure, lived up to expectations, finance executives tend to remain
with deals seen as a way of achieving cost savings, whilst also comfortable with their growth strategy and deal-pricing
reducing capacity in the industry. approaches. They tend to lay the cause of deal failure at the
door of broader concerns such as not being able to actually
• The acquisition of Amlin is seen as a way for Mitsui exert management control, the practicalities of implementing
Sumitomo to diversify their non-life insurance operations away change and the reality of merging disparate corporate cultures.
from their home country, which is vulnerable to costly natural
catastrophes and is experiencing low growth; and Towers Watson asked HR executives from across all
industries to discuss what actions they felt were important
• The Belgian insurer Ageas announced its intention to sell during an M&A transaction, and then compared the responses
its Hong Kong insurance unit to a Beijing-based asset manager of those that experienced very successful M&A deals to those
JD Capital for US$1.4 billion, exiting a business it acquired whose deals were less successful.
eight years ago. Ageas was quoted as saying that the decision to
sell their business in Hong Kong was the result of a realignment The three areas identified as differentiating success from
of their strategy towards the fast growing emerging markets of failure were:
Asia. • Influencing effectiveness of senior leadership
• Effectively and openly communicating with employees
Deals across the (re)insurance sector appear to be stimulated
by an improving economic outlook, as well as low interest rates throughout the transition
which mean a low cost of financing for buyers, as in any sector. • Creating and implementing strategies to retain key
But how can senior executives ensure deals are successful?
The theory… employees
In any introduction to corporate finance, we are taught that This study showed that whilst there is no one-size-fits-
the price of a company can be computed as the present value all approach, successful deal makers focus on people, and
of all future dividends. This is more or less a reasonable basis particularly, the retention of key talent.
for valuation, as these dividends are the monies that would Fail to plan…Plan to fail
be received in exchange for an investor’s consideration. If we Sales volumes and profits are driven by key leadership talent.
know the value of these dividends with certainty, we can then Although the fundamental mathematics behind how to derive
produce a true estimate of the worth of a company. However, in and improve market price is simple in theory, having the vision
practice, we only have an expectation of what these dividends to achieve this and the tools to successfully merge two people-
will look like, so we can only estimate what a reasonable price
might be. driven businesses in order to retain talent
and generate long-term outperformance is
Source: Towers Watson Global M&A Retention Study, 2014 both critical and far less easy in practice.
From a recent Global M&A Retention
Study, we discovered that respondents
were about half as likely to respond that
they were highly successful in meeting
their talent objectives (24%) in an M&A
transaction, as compared with meeting
their strategic objectives (49%) – see
figure below.
10 SIRC Supplement • November 2015 • www.asiainsurancereview.com Back to Contents
